As many nonprofits struggle financially as a result of the COVID-19 crisis, some are considering merging with another organization to survive. Nonprofit mergers are nothing new, of course, but they’re not always a good idea. Read on to learn some of the factors you should weigh when evaluating merger opportunities.
Wise reasons to merge
Successful mergers are based on a foundation of solid motivations. For example, you might decide to merge to establish the stability that makes it easier to pursue your mission. Such a union could lead to a stronger organization better able to survive difficult times. You also might want to merge to reduce the competition for funding, which could intensify as cash-strapped state governments cut back on their nonprofit grants and contracts in the wake of the pandemic.
A merger can help nonprofits achieve economies of scale that will make the merged organization more efficient, too. This might come, for example, from combining infrastructures — everything from staffing and board leadership to administration, information systems, human resources and accounting.
A merger could also give you access to a wider network, as well as more perspectives and experiences to base decisions on. And it might enable you to provide more programming or add locations.
Questionable reasons to merge
For all of the worthwhile reasons to consider a merger, it’s important to remember that mergers do fail. One common reason is that the merger itself, as well as the new organization, can cost much more than expected. In the short term, for example, you’ll need to finance transactional and integration costs.
Over the longer term, larger and more complex organizations generally incur greater costs than smaller ones. Moreover, any dollars saved by a nonprofit typically are invested in programming because the demand for services is always there. Improved efficiency — not reduced costs — should be the driving force behind a proposed merger.
Arrangements intended to “rescue” a failing organization are another red flag when it comes to nonprofit mergers. In this scenario, you usually see a larger, more stable nonprofit swoop in to save a smaller counterpart that, despite its weaknesses, has something to offer, such as loyal donors or lucrative government contracts. But a merger isn’t likely to solve problems such as poor leadership or business practices. The better approach in such a situation is for the larger nonprofit to acquire assets, or viable pieces, of the smaller organization. These can enhance the acquiring organization without adding liabilities.
Potential partners
If you do decide to proceed with a merger, start the process by identifying a likely candidate with which to combine forces. A misstep easily could doom a merger to failure.
What should you look for in a merger partner? First and foremost, the two organizations should share similar missions, values and cultures. If these aren’t aligned, it will prove nearly impossible to unite around a common vision for the future.
That doesn’t mean you have to offer duplicative services, but they should at least complement each other. For example, an organization that helps the homeless find homes might team up with a nonprofit that provides employment services to the economically disadvantaged. If you find yourself constantly competing with an organization for resources, odds are you’re well aligned.
Proceed with caution
Regardless of the impetus, merging two nonprofits is no small task, and you’ll want to tap outside expertise. Financial and legal due diligence, contract negotiation and organizational reintegration are time-consuming and challenging. Don’t go it alone.